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Once upon a time, the treasurer of “Mighty Corporation” (MCO) decided to issue a bond (hereafter:...

Once upon a time, the treasurer of “Mighty Corporation” (MCO) decided to issue a bond (hereafter: The bond) The bond would have a 20-year life and promised that the holder of the bond would receive:

  • 20 annual payments of $80,
  • Along with the 20th payment, MCO promised to return the principal of $1,000. In other words, the final payments received at maturity would be ($1000+$80) = $1080.
  • Principal price of bond: $1,000
  • FV of bond received: $1,080

Question #1:

A) On the day it is issued, what is the Coupon Yield?

B) On the day it is issued, what is the Yield-to-Maturity (YTM)?

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Answer #1
Coupon yield = Annual coupon payment / Current price
Coupon yield = 80/1000
Coupon yield = 8%
Yield to maturity = (Coupon + (F - P)/n) / (F + P)/2
F = Future value
P = Price
n = number of periods
Yield to maturity = (80+((1080-1000)/20))/((1080+1000)/2)
Yield to maturity = 8.08%
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